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When Equal Is Not Equal, Charity Can Help

Posted November 2015

John, a widower, wanted to leave his children equal portions of his estate, so he decided to give each of them different assets of the same value. John’s expectation was that they would receive equal amounts, but when taxes were taken into account the children were treated unequally—and that difference has implications for charitable gifts as well.

In our example, John left his son David $500,000 of stocks in his brokerage account, named his daughter Nancy as beneficiary of a $500,000 life insurance policy, and named his son Tom as beneficiary of an IRA account worth $500,000 at the time of John’s death.

David paid no tax on the capital gain in the stocks that accrued before his father’s death because the cost basis of those stocks was “stepped up” to their value as of the date his father died. Likewise, Nancy paid no tax on the life insurance proceeds because proceeds paid upon the death of the insured are not subject to income tax. However, the entire amount distributed to Tom from the IRA was taxed; with a tax bracket of 33 percent, he paid $165,000 in income tax, leaving $335,000 after taxes.

When arranging gifts to loved ones, it is important to consider the taxation of assets as well as the value of the assets. Remember that your heirs will generally not pay income tax on the securities, real estate, and tangible property that you leave to them—but they will pay income tax on distributions from a regular IRA, 401(k), or other retirement plan and also from the gain in assets such as savings bonds and commercial deferred variable annuities. To have achieved equality of results, John should have given each child one-third of each of the three assets.

If you have numerous assets and you want to leave a legacy to our organization, you could make your charitable gift from your retirement fund assets and give the other assets to your children. Because our organization is tax-exempt, it will not be taxed on the retirement funds. Your children will be glad to be receiving the assets that don’t trigger a tax.

To make such a charitable gift, you need only request a change-of-beneficiary form and indicate the percentage of remaining funds you want to give to us. Please contact us to discuss this and other charitable gift options.

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